ValueClick Q3 2007 Earnings Call Transcript

Nov. 1.07 | About: Conversant, Inc. (CNVR)

ValueClick, Inc. (VCLK) Q3 2007 Earnings Call November 1, 2007 4:30 PM ET

Executives

Gary Fuges - Manager of IR

Tom Vadnais- CEO

Sam Paisley- CAO

Analysts

Mark Mahaney - Citi Investment Research

Youssef Squali - Jefferies & Co.

Terry Heath - Credit Suisse

Imran Khan - J.P. Morgan

Mark Bacurin - Robert W. Baird

Aaron Kessler - Piper Jaffray

Brian Pitz - Banc of America Securities

Christa Quarles - Thomas Weisel Partners

Eric Martinuzzi - Craig-Hallum

Mark May - Needham & Company

ChadBartley - Pacific Crest

Sandeep Aggarwal - Oppenheimer & Co

Mayuresh Masurekar - CIBC World Markets

Robert Coolbrith - ThinkEquity Partners

Peter Kuechle - Frontier Capital

Operator

Good day. My name is Sarah and I will be your conferencefacilitator today. A replay of this call will be available by telephonebeginning at 4:30 p.m. Pacific Time today and will be accessed through 10 p.m.Pacific Time on November 8, 2007. Thereafter, it can be accessed onValueClick's website at www.valueclick.com or www.streetevents.com. Previouslyfiled SEC filings can also be found on ValueClick's site.

All lines have been placed in a listen-only mode to preventany background noise. After the speakers' remarks, there will be aquestion-and-answer period. (Operator Instructions).

At this time, I would like to turn the conference over toMr. Gary Fuges, Manager of Investor Relations for ValueClick, Incorporated.Please go ahead, sir.

Gary Fuges

Thank you, Sarah. Good afternoon, and welcome toValueClick's third quarter 2007 financial results conference call. On the callwith me today are Tom Vadnais, Chief Executive Officer; and Sam Paisley, ChiefAdministrative Officer.

Today's call contains forward-looking statements thatinvolve risks and uncertainties, including, but not limited to, trends andonline advertising spending and estimates of future online performance basedadvertising. Actual results may differ materially from the results predictedand reported results should not be considered an indication of futureperformance.

Important factors which could cause actual results to differmaterially from those expressed or implied in the forward-looking statementsare detailed under the Risk Factors section and elsewhere in filings with theSecurities and Exchange Commission made from time-to-time by ValueClick,including its annual report on Form 10-K filed on March 1, 2007, recentquarterly reports on Form 10-Q and current reports on Form 8-K.

Other factors that could cause actual results to differmaterially from those expressed or implied in the forward-looking statementsinclude, but are not limited to, the risk that the market demand for onlineadvertising in general and performance based online advertising in particularwill not grow as rapidly as predicted, and legislation and governmentalregulation could negatively impact the company's performance. ValueClickundertakes no obligation to release publicly any revisions to any forward-lookingstatements to reflect events or circumstances after the date hereof or toreflect the occurrence of unanticipated events.

With that, I would like to turn the call over to Mr. TomVadnais, CEO of ValueClick. Tom?

Tom Vadnais

Thank you, Gary.Good afternoon, everyone, and thanks for joining us for our third quarter 2007conference call. As you all know, on October 16th, we revised our Q3 and fullyear guidance as a result of continued softness in our lead gen business duringQ3. Today, we will report our final Q3 results and Q4 outlook, which I am happyto say, are in line with our updated guidance.

Our third quarter revenue is at the high-end of the range weprovided in our October 16th call. Our softness in the lead generation part ofour Media business was primarily in the promotion-base segment that is relatedto the ongoing FTC investigation, which I will talk about in just a second.There was some spillover into the non-promotional segment of lead gen business.And this is because the advertisers generally use multiple types of lead genofferings and when they shift their way from this type of advertising it canboth those segments.

As you may recall, our revised guidance on October 16th,focused primarily on Q3 and Q4 revenue, we did not change our adjusted EBITDAor EPS guidance. Our focus on execution has enabled to us meet our original EPSand adjusted EBITDA guidance ranges for the third quarter. Before I give you abrief update on how our business units performed last quarter, I would like toupdate you on the ongoing FTC investigation regarding the lead gen business.

We are currently in active negotiations with the FTC staff,but these negotiations are in their preliminary stages. At this point weanticipate the likely outcome will be fine, the amount of which we did notbelieve will be material to the company's overall financial position.

In addition, we also anticipate a speculated injunctionbetween ValueClick and the FTC. While the terms of the injunction are currentlybeing negotiated, we believe that any stipulation entered into with the FTCwill provide clear guidelines for our lead generation practices going forward,and we hope, will help establish clear set of standards for the entireindustry. As always, we refer you to our quarterly report, which will be filedshortly for specific disclosures on this and other issues.

Now, I would like to give you a brief summary of our Q3performance. Other than the lead gen segment, our other businesses haveperformed well all year. In Media, we continue to see strong growth and displayadvertising. With year-over-year growth, worldwide display ad revenueaccelerated from 21% in 2Q '07 to 42% growth in 3Q '07. The network enjoyedcontinued revenue diversity along all pricing models.

Another growth driver was our patented behavioral targetingtechnology, which is gaining more traction with our advertising missions.Behavioral targeting revenue more than doubled from Q2 and more than tripledfrom the year ago period.

Regarding our ongoing efforts to maximize synergies betweenour business units, in Q3 we also began to explore ways to leverage MeziMedia'ssearch expertise to drive traffic to our lead generation offers. Prior to theacquisition of Mezi, we were not using search as a traffic source for leadgeneration. It's only in the process, but I am encouraged by the synergypotential between lead gen and Mezi search capabilities. Other synergyopportunities between Mezi and ValueClick include leveraging the directadvertising relationships that exist across ValueClick to bring more businessto the Mezi sites such as Smarter.com and CouponMountain.com.

In our Affiliate Marketing business, Commission Junction hadanother strong quarter of growth with continued success in winning and launchingnew clients. We believe we've added to our leading market share in the USover 2007 and the pipeline of potential new customers is strong. In thequarter, we launched creative services and advanced training services, and weare also seeing traction from an earlier initiative to leverage to Mediasegment for CJ Advertiser offers.

In our Technology segment, we also had another good quarter,with both growth and expanding margin. The profit enhancements we have madeover the past year in both Mediaplex and Mediaplex System is going to continueto give traction going forward. The ability to track campaigns across multipleonline channels and provide behavioral targeting capabilities differentiatesour Mediaplex technology from the alternatives in the marketplace.

And finally, our Comparison Shopping segment had anexceptional quarter. PriceRunner Europe had a good quarter with pro formaorganic year-over-year revenue growth of more than 30%. And MeziMedia in the USComparison Shopping market was also stronger than expected.

So, with that brief overview of our business segments, Iwould like to now turn the call over to our Chief Administrative Officer, SamPaisley for some details on our quarter and our updated guidance. Sam?

Sam Paisley

Thanks Tom. Before I discuss our financial results, I wantto mention that third quarter 2007 results include two months activity fromMeziMedia, which was acquired in July, 2007. In the third quarter of 2007ValueClick generated revenue of $156.9 million, a 14% increase over Q3, 2006revenue of $137.9 million. Organic growth, calculated assuming MeziMedia hadbeen acquired at the beginning of both quarters, was approximately 11%.

Gross profit was $106.4 million for the third quarter of2007, an increase of 7%, compared to gross profit of $99.2 million for Q3,2006. Gross margin was 67.8% in the third quarter of 2007 compared to 71.9% inthe third quarter of 2006. Gross margin decreased, primarily because of thereduction in mix of lead generation revenue from owned and operatedpromotional-based websites in the third quarter of 2007.

Operating expenses, excluding stock-based compensation andamortization expense, totaled $68.8 million, or 44% of revenue in the third quarterof 2007, compared to $65.9 million or 48% of revenue in Q3 2006.

Sales and marketing expenses were virtually flat on anabsolute dollar basis in Q3 2007 versus 2006, due to the decline in advertisingcost supporting owned and operated promotional sites. Stock-based compensationin aggregate was $4.6 million in the third quarter of 2007, compared to $3 millionin 2006. This increase is primarily attributable to the higher fair valueassigned to each option granted in 2007, compared to 2006. Resulting from thehigher trading price of the company's common stock at the time in the 2007grants and higher assumed volatility.

Amortization of intangible assets was approximately $6.7 millionin third quarter of 2007, compared to $5.5 million in 2006. This increase isprimarily due to the addition of new intangible assets from July 2007acquisitions of MeziMedia. The company generated operating income of $26.3million in Q3 2007, compared to $24.8 million in 2006. Operating margin was 16.8%compared to 18% in year-ago period.

Net interest income was $2.9 million for the third quarterof 2007, compared to $1.6 million in Q3 2006, due primarily to highermarketable securities balances and improved investment yields on our portfolio.

Income tax expense for Q3 2007 was $12.4 million, and thecompany's net effective income tax rate was 42.5% in the quarter. We anticipatea net effective income tax rate of 42.5% in Q4 2007, and a full year 2007 neteffective income tax rate of 42%

These figures result in third quarter 2007 net income of$16.8 million, or $0.17 per share based on a weighted average number of 100.2million diluted shares outstanding. This performance is at the high-end of ourguidance range of $0.16-$0.17 per share.

Adjusted EBITDA was $40.1 million for the third quarter of2007, compared to $35.6 million in the prior year. Adjusted EBITDA margin was25.5% in Q3 of 2007, compared to 25.8% in the prior year.

The consolidated balance sheet as of September 30, 2007remains strong with $251 million in cash, cash equivalents and marketablesecurities, $687 million in total stockholders' equity, and no long-term debt.Uses of cash in the quarter included $96.8 million in net cash related to theMeziMedia acquisition, and $44 million to repurchase $2.3 million shares aspart of our share repurchase program. As of September 30, 2007 the company hasapproximately $56 million of authorization remaining on its share repurchaseprogram.

Capital expenditures were approximately $1.4 million in Q32007.

I will now discuss the third quarter performance in each ofour four worldwide business segments. Today's press release includes a table ofsegment level financial performance. Segment operating income excludescorporate expenses, amortization of intangibles and stock-based compensation.

Worldwide Media revenue was $85.6 million in the thirdquarter of 2007, compared to $98.4 million in Q3 2006. Strength in US andEuropean Display Ad business was offset primarily by the weakness in thepromotion-based business that Tom described earlier. Display media revenuegrowth was approximately 42% year-over-year in the quarter.

Media's gross margin was 59% compared to 67.8% in Q3 2006and segment operating margin was 20.1% in the third quarter of 2007, comparedto 24.8% in the year ago quarter. The reduction in gross margin resulted from adecrease in the mix of promotion-based revenue in 2007, which was offset by adecreased in advertising cost used to support related, owned and operatedpromotional sites.

The decrease in segment operating margin was primarilyattributable to an increase in discretionary marketing spend in our display adbusiness and increased cost in the lead generation business associated withlegal collections and consolidation activities. The integration of our leadgeneration businesses was completed during the quarter. So, Q3 results do notreflect the full cost savings associated with the integration.

Worldwide Comparison Shopping revenue increased more than400% on a reported basis to $29.4 million in the third quarter of 2007.Primarily, due to strong PriceRunner, Europeperformance and the inclusion of two months results of MeziMedia. Pro formaorganic year-over-year revenue growth was 118%. Gross margin of 75.2% declinedfrom 91.3% in 2006, due to an increased mix of distribution partner revenue.Segment operating margin increased to 22.3% compared to 10.9% in the year agoquarter, primarily due to the higher net operating margin of MeziMedia.

Worldwide Affiliate Marketing revenue increased 25% to $34.1million in the third quarter 2007. Due to primarily to an increase in ournumber of customers and an increase in transactional volume associated withboth new and existing customers. Gross margin of 79% declined from 81% in 2006,due primarily to the increase mix of search business. Segment income margin of47.3% in the third quarter of 2007 declined only 40 basis points from 47.7% in2006, because operating expense leverage from the growth in revenuessignificantly offset reduction in gross margin attributable to the increasedmix of search business.

Worldwide Technology revenue increased 26% year-over-year to$8.2 million, due to growth in both the USand Europe. Gross margin of 83% expanded from79% in 2006, and segment operating margin expanded to 42% in Q3 2007 from 29%in a prior year due to operating leverage associated with higher revenue. Basedon our third quarter results and revised outlook for 2007, we are updating ourguidance as follows.

For the fourth quarter of 2007 we expect revenue ofapproximately $172 million to $177 million. We expect adjusted EBITDA in therange of $42 million to $45 million. And we anticipate diluted net income percommon share $0.17-$0.18, including stock-based compensation expense ofapproximately $0.03 per common share, based on an expected share count ofapproximately 100 million diluted shares outstanding.

For the full year 2007, we expect revenue of approximately$635 million- $640 million. We expect adjusted EBITDA in the range of $162million- $165 million. We anticipate diluted net income per common share of$0.70- $0.71, including stock-based compensation expense of approximately $0.11per common share, based on an expected share count of approximately 101 milliondiluted shares outstanding.

The full year 2007 guidance assumes approximately $25million to $26 million in amortization of intangibles, $9 million- $10 millionin depreciation, $18 million-$19 million of stock-based compensation, and neteffective income tax rate of 42% and capital expenditures of $10 million- $11million.

I will now turn the call back over to Tom for some closingcomments.

Tom Vadnais

Thank you, Sam. I think what we should do now is just gostraight to the Q&A session.

Question-and-AnswerSession

Operator

Thank you. The question-and-answer session will be conductedelectronically today. (Operator Instructions). And our first question will comefrom Mark Mahaney with the Citi Investment Research.

Mark Mahaney - CitiInvestment Research

Great, thank you, I would like to ask two quick questions,please. On the behavioral targeting initiatives or what you seeing in themarketplace, it looks like you are seeing very strong growth. I am sure that'soff of small basis, but it's still strong. Are you specifically seeingadvertisers willing to pay materially more for behaviorally targeted ads thanfor regular ads? And then secondly, it sounds like US and European displayadvertising as a whole seems relatively strong, could you peel that back alittle bit? Are there particular verticals, particular industries where you areseeing greater than expected strength? Thank you very much.

Tom Vadnais

Mark, on your first question, and I will let Sam cover yoursecond question. On behavioral targeting, it is a small base. Behavioraltargeting it's a lot of conversation, but it’s still a very small piece of therevenue. So, we are glad to see it double and tipple in size, but it's not bignumber yet. But, hopefully it will be. And from a pricing standpoint it's not ahuge uplift. I have to get you some exact numbers if you want those we can dothat later. But, it's a nice feature and we think we've god leading edgetechnology and to the extent that we can continue to drive that, which I thinkwe can, and grow it at a slight premium, I think it’s a good offering for us.Sam, I will let you try to respond on the segment issue on display.

Sam Paisley

Right, in terms of the drivers of the display growth sidefrom general market factors, there is small amount of price lift though relatedto behavioral targeting and video. It's also true that we have initiativesworking with some major publishers to help them in the monetization of theirmedia supply and we have shifted a fair amount of inventory away from leadgeneration into display just to meet market demand. So, all those are factorsthat are explaining some of the growth in display in current year.

Mark Mahaney - CitiInvestment Research

Thank you, Sam. Thank you, Tom.

Tom Vadnais

Thanks Mark.

Operator

Our next question will come from Youssef Squali.

Youssef Squali -Jefferies & Co.

Thank you very much. Youssef Squali. Two questions here aswell. Sam in prior quarters you kind of helped to isolate for us thepromotional revenues and then the [O&O] business. I was wondering if youcould help go through that exercise for us again, just so that we can maybeextract some of these revenues that were at issue here. And second, as we lookat '08, do we have any visibility into kind of how long it will take before westart getting those advertisers that pulled back because of the FTC issue. I thinkyou talked resolving that issue. Have any, I guess, ideas to the timeline forthat as well?

Sam Paisely

Let me -- do you want to go ahead and take those Tom?

Tom Vadnais

Go ahead, Sam.

Sam Paisely

I will try to answer the second question first. It's sort ofa non-answer in that. Even though we have given a bit of a status on where weare engaged with the FTC, it's still a pending matter and we are not in anyposition to really predict exact timetables. And on the point of furtherclarification on the part of our business, is promotional lead generation ownedand operated versus the total.

It is fair to say, that we suffered a more than anticipateddecline in the promotional owned and operate revenue in the current period. Inthe third quarter, it was about $9 million decline over the second quarter andwe are now at a point where overall lead generation in the company is ever soslightly less than 60% in total media revenue.

Youssef Squali -Jefferies & Co.

Okay, great. Thanks.

Operator

Our next question will come from Terry Heath with CreditSuisse

Terry Heath - CreditSuisse

Great. Thank you. I was wondering, just to kind of go backto some of the higher level stuff you have talked about before. If you can giveus an idea for what kind of traction you are seeing in video based advertising?What percentage of your ad network is actually able to accept the videoadvertising that you are putting through it? And then What kind of demandrelative to that supply that you are seeing from advertisers?

Tom Vadnais

Well, I will start that and Sam jump in as we go. It'sgetting more conversation than it is business at this point. That segment is, Ithink a directional one for the business, but not one that we are seeingsignificant volumes in or demand for at this point. Sam, you want to expand onthat?

Sam Paisley

Yeah, the only thing I would elaborate on would be to saythat it's a very small percentage of the total mix of ads that are occurring.And I think, I had also observed that the most recent eMarketer number seems toindicate that the original forecast on video ad serving in the US market for 2007 really wasn't revised, eventhough I think they saw the total growth in the US advertising markets being higherthan their original forecast. It's still an area that in the future we areexpecting good lift and promise from. But, I would agree with Tom it's not amajor factor in the current year.

Tom Vadnais

Does that answer your question, Terry?

Terry Heath - CreditSuisse

That does. Thank you.

Operator

Our next question will come from Imran Khan with J.P.Morgan.

Imran Khan - J.P.Morgan

Yes. Hi, thank you for taking my questions. Two questions,number one is MeziMedia, in the past when you look at the Comparison Shopping,their performance was uneven and I was wondering what differentiate MeziMediafrom other comparison shopping that we are seeing such a strong growth and wecan think that growth is sustainable. And second question is, it seems likeyour display ad business is doing very well, considering some of the large capInternet companies are trying to build their ad network in the display site.How defensible your display ad business is? Thank you.

Tom Vadnais

Let me understand the last part of your question, you saidhow…

Imran Khan - J.P.Morgan

Yes. So clearly, and I think if you look at recently TimeWarner talked about creating Platform A, Yahoo! with their acquisitions of BlueLithiumand trying to aggregate lot of traffic in the marketplace. So, trying to betterunderstand as these companies are trying to effectively compete with you what,help us better understand that your differentiations that you think you cangain market share or maintain your market share? Thank you.

Tom Vadnais

All right. On the Mezi side, and Sam I will let you comingon the display side. Mezi's differentiation is there are leading edgetechnology and SEM side of their search. They have done an excellent job indeveloping their technology and it's been a great addition not only to ourComparison Shopping business, but as I mentioned in the earlier comments we cansee synergies in other parts of our business too using the Mezi technology.

So that’s largely a technology answer there. Sam you want tocomment on the display question.

Sam Paisley

Yeah, I think, one aspect that you should remember on thedisplay side that even now there are new owners of certain businesses theleadership and the people that we’ve been competing against on the display sidehave been the same players for ever since ValueClick started to business inlate 1990s.

So even though there is change in ownership and changes inleadership, the competition is essentially the same. So I’m not sure that thelandscape has really changed. Some of the core aspects, I guess what’s fuelingsome of the new interest in networks have to do with both optimization andbehavioral targeting capabilities.

And although, we haven’t necessarily been continuouslybeating the drum to tell you about our skills in that area, it’s absolutelytrue that we have patented behavioral targeting technology and we’ve had a veryconsistent focus on continuously improving our optimization capabilities. Andthat’s why one of the reason, we’ve been able to sustain ourselves in aleadership position in the display business.

Imran Khan - J.P.Morgan

Great thank you. That’s helpful.

Operator

Our next question will me come from Mark Bacurin with RobertW. Baird.

Mark Bacurin - RobertW. Baird

Hi good afternoon. I want to drill down on the ComparisonShopping Group little bit and understand the contribution from MeziMedia. Ithink going back and looking at my note, you guys have talked about MeziMediahad about $60 million of revenue in ‘06 and I think due to the first sevenmonths it was roughly $43 million. So I am trying to understand the prettysignificant contribution for what I believe is only at two months ad in Q3. Socould you just break up for specifically what the MeziMedia contribution was inQ3?

Sam Paisley

It was around $20 million.

Mark Bacurin - RobertW. Baird

Is there a seasonal pattern to that that makes it higher inQ3 that seems high relative to if bigger could you confirm that $43 million wasthe number to the first seven months?

Sam Paisley

Yeah, I believe the number that was viewed by many people inthe 8-K that we filed with the real three or five statements on Mezi was $36.7million I believe.

Tom Vadnais

Right.

Mark Bacurin - RobertW. Baird

Now this first six months. Correct.

Tom Vadnais

So many people have extrapolated that to about $43 millionpre acquisition.

Mark Bacurin - RobertW. Baird

So, I mean is it fair to say that business accelerated sincethe time it was acquired and the some that the revenues synergies that you aredriving?

Sam Paisley

Yeah I mean it's well -- to catch it up back, as wementioned on the earlier part of the call, the organic growth rate in thecombined MeziMedia price run of business year-over-year for the third quarterwas 118%. So indeed this is a business that's experiencing some very attractivegrowth rates. One of the things I think that's important to realize for us isthat in this business, it is a challenging business from the standpoint thatit's a publishing business that aggregates content using search as well aseditorial skills and the monetization is really done in a way that affordsmonetization through revenue partners like affiliate marketing managementservices companies as well as search companies as well as displayed medianetworks.

So, most of the pure players in this business don't haveaccess to all the expertise in each of those revenues channels. And within ourcompany, we can bring the bear all those various strategies. It's also truethat, there are some interesting compliments between Mezi and PriceRunner.

PriceRunner was more of the pure content publisher. Mezi isa content publisher that has a great appreciation for SEO capabilities as wellas some very unique expertise in paid search. So, combining the two is almostthe best of both roads and the other aspect of Mezi that they have done awonderful job. One has the ability to publish more than one consumer brand,displaying the content in a differentiated way and not having to be focused ona single unique consumer brand.

So, we are very excited about the business and very, I guessbullish on its ability to continue to grow at very attractive rates incomparison to the total company.

Mark Bacurin - RobertW. Baird

And just to confirm, seasonally the fourth quarter, for theentire comparison shopping and I assume this is the case of MeziMedia as wellthat seasonally fourth quarter is the strongest quarter?

Sam Paisley

Yeah, generally our businesses experience the strongestquarter in the fourth quarter.

Mark Bacurin - RobertW. Baird

Okay great and then I just want to confirm. Sam, I think onanswering question earlier. I thought I heard you say, that lead generation intotal, I thought you said just under 60% of media revenue.

Sam Paisley

Correct.

Mark Bacurin - RobertW. Baird

Isn't, that the same stat that you said in the first quarterand I think you even filed in 8-K the total…

Sam Paisley

No, we actually said more than 60%, it's also true, thatwith the consolidation activities that had been ongoing within the company andlead generation we, slightly changed the scope of our definition of leadgeneration. And I emphasize the word slightly. But, with the consolidationactivities we have now crisper definition of what's under the managementcontrol of that group. So, what we said in the first quarter was that well over60% of our media revenues were lead generation oriented. We said on lastquarter's call that we were still above 60%. And what we are seeing on thecurrent quarter call for lead generation in total that we are just a tick under60%.

Operator

Our next question will come from Aaron Kessler with PiperJaffray.

Aaron Kessler - PiperJaffray

Hi, guys, couple questions here. I think you said thedisplay part of the media business grew about 40%. It includes kind of theValueClick media display and kind of lead gen, excluding the promotional basewhat the growth was there? And then on the FTC investigation, anymore details?Are they looking out for disclosures of the promotions or may be the bandwidthrate or both of those factors? And just following for some of like comparisonshopping, is the strength more on the SEO side of that business or is it morebid management? And when do you expect PriceRunner to benefit from thesynergies there as well. Thank you.

Sam Paisely

Wow, that's a chart full of questions, question.

Tom Vadnais

How much time do you have Aaron for us to go through this.The FTC one is probably as good a place to start as any on those. And wepreviously announced what the FTC had requested and that was informationregarding traffic in the promotional sector that we are driving traffic to ourcompany owned sites through e-mail. And that continues to be their focus andthat's what we are discussing with them and we've given information to them.So, we don't have anything else really we can say on that. On the displaygrowth, I am not sure I understood the question. The 40% year-to-year number iswhat we did say. What was the question?

Sam Paisely

Yeah. Let me see if I can take that, Tom, can clarify whatwe indicated on the call. What I mentioned on the call was that our display adbusiness, and that would exclude what I just characterized as lead generation,grew at a 42% organic growth rate in the third quarter of 2007 against thatsame quarter in 2006. And I think the other part of your question was, withrespect to comparison shopping is the growth being fueled by SEO or SEMcapabilities and when will we see those skills applied to PriceRunner from thestandpoint of impact on results.

And what I would say on that relative to performance that,what's going on within Mezi is the combination of both SEO and SEM. And as Tommentioned on the call, we've had some early discussions among the teams abouthow those skills could be applied to the PriceRunner. But, we still don't havecurrent measurable affects on the revenues of PriceRunner just yet. So, that'ssomething to come.

Aaron Kessler - PiperJaffray

Great. Thank you.

Operator

Our next question will come from Brian Pitz of Banc ofAmerica Securities.

Brian Pitz - Banc of AmericaSecurities

Thanks. Regarding the growth in yourAffiliate marketing segment, can you tell us if the SEM business you acquiredfrom Mezi is included in that segment? Or was it left in the comparisonshopping piece. And if so, can you comment on the organic growth of affiliatemarketing for the quarter?

Then second unrelated, you noted ashift more towards display versus lead gen. Can you clarify is that a trend oris it because clients were avoiding the lead gen, because of the FTC? The IBhas been saying that pricing is going away from CPM base. Any commentary onthat it will be great? Thanks.

SamPaisely

Okay. Make sure I get all of thosequestions. Classification of Mezi is entirely in comparison shopping and keepin mind that when we have to deal with segment reporting, it's largely drivenby management structure. And so, that kind of rules when it comes to theclassification judgment and the clear answer is that Mezi is entirelyencompassed in our comparison shopping SEC reporting segment.

The organic growth in affiliatemarketing, which is consistent with the classification we have had in thatsegment pre acquisition of Mezi, was an organic growth rate of 25% in thecurrent quarter. And I would say the shift in display over lead generation isboth a kind of a current period rather than maybe a longer term shift in trendsin the industry and has something a good deal to do with the specifics abouthow we are managing between demand that we have for lead generation advertisingas apposed to display, particularly in terms of publisher preference. And Iwould consider that to be somewhat company specific and short-term trend innature.

BrianPitz - Banc of AmericaSecurities

Great. Thank you.

Operator

Our next question will come fromChrista Quarles with Thomas Weisel Partners.

ChristaQuarles - Thomas Weisel Partners

Hi. And just first question Iguess is on the lead generation side. I think you talked, or I had beenestimating I guess, around $235 million for the full year for lead gen and sortof based on what I think you have done year-to-date based on your percentages,let's see, again trying to equilibrate. That would call for a decent tick-up inQ4, clearly, there is seasonality, but I was just wondering if you could, kindof embellish upon what your expectation is in terms of the weakness that you'reseeing versus seasonality that we would expect?

And then, the second question Iguess I have is on your behavioral targeting side. You know given some of thecompetitors in the space AOL buying Tacoda and supposedly rumor to be buying[Crego]. Do you feel comfortable with your current technological set? Do youneed to expand? Are you starting to feel any competitive pressures in themarket as some of these other players expand their offerings? Thanks.

Tom Vadnais

I missed, who was, who thisquestion was from?

Christa Quarles - Thomas Weisel Partners

It's Christa Quarles of ThomasWeisel.

Tom Vadnais

Okay. Well on the lead gen, youwere looking for a full year number for lead gen?

Christa Quarles - Thomas Weisel Partners

Yeah I think, based on yourcomments around its little less than 60%, a little more than 60%, I wasestimating about 235 to 240 for the year before, but the decline this quarterwas such that I think that maybe too optimistic. But, clearly there is aseasonal uptick that one might expect there in Q4. So, I am just trying tomeasure the offset between seasonality and the weakness in the business?

Sam Paisley

Without going beyond what we'vealready disclosed Christa, I will say that if your estimates are that we are inthe $235 million to $240 million range for lead generation activities in totalwithin the media segment, you are not to far off. And your conjecture that weare not expecting much of any of the seasonal lift in the fourth quartercontribution out of that business would also be correct.

Christa Quarles - Thomas Weisel Partners

Okay.

Gary Fuges

And Christa, this is Gary. In thepreannouncement press release, we actually quantified our expectations for leadgeneration revenue in the fourth quarter.

Christa Quarles - Thomas Weisel Partners

Okay. So that was the 240 atthat?

Gary Fuges

That was $48 million to $49million in the fourth quarter.

Christa Quarles - Thomas Weisel Partners

Okay, for both promotional andO&O?

Gary Fuges

The total lead generation,correct.

Christa Quarles - Thomas Weisel Partners

Okay. And then on the other side?

Tom Vadnais

Well, the other part on leadgenerations that we covered on the October 16th call, was making the point thatwe think that the business has stabilized when we had our announcement of theFTC investigation and looked at our third quarter projections, we said it wasstabilizing and now we think it's stabilized. So, that's what we've used tocome up with the numbers we've forecasted for the rest of the year. Once theinvestigation concludes and the new rules of the road hopefully emerge on the FTCin this sector, hopefully we going to do growth mode. But, right now ourexpectations are flat for this business.

On that technology thing, Imentioned in the opening comments that we've had a patent in behavioraltechnology for a long time. And we are very comfortable with our technologyhere stacking up against anybody else in the industry. So that's something weare happy to talk more about, if you want to have a separate conversation, weare happy to go into more detail with you about our technology.

Christa Quarles - Thomas Weisel Partners

Okay. Thanks.

Tom Vadnais

Thank you.

Operator

Eric Martinuzzi with Craig-Hallum,has our next question.

Eric Martinuzzi - Craig-Hallum

Thanks, I just wanted to startwith the clarification before I asked my question. Based on the press releaseit looks like the implied revenue number for Q4 '06, assuming MeziMedia werearound would be around a $175 million. Is that correct?

Sam Paisley

Yeah, that's in the ball, that'ssits within range, we said 172 --

Tom Vadnais

'06.

Eric Martinuzzi -Craig-Hallum

'06.

Tom Vadnais

Is that what you said was Q4 '06?

Eric Martinuzzi - Craig-Hallum

That's correct.

Tom Vadnais

Yeah.

Eric Martinuzzi - Craig-Hallum

A $174.7 million.

Tom Vadnais

What else as we do a littlenumber checking on that, what was your other question?

Eric Martinuzzi - Craig-Hallum

Well, assuming that number werecorrect, I was going to take that and bounce it against where we've got it forQ4, I guess the 175 at the high end. So, basically looking flat year-over-yearobviously the delta here being the weakness in the promotional lead gen. I'mtrying to get at what is the organic growth rate implied in the Q4 guidance. SoI'm backing out a number from Q4 '06. What should that number be? Now you'vetalked about the decline in promotional lead gen. I think it was down $10million bucks in Q2 and then down another $9 million in Q3. That puts me atabout, I don't know, around 12% implied organic growth rate. Is that correct?

Tom Vadnais

Yes. So what you really think,you want the pro forma Q4 '06 number against our Q4 '07 projection, and you aretrying to calculate the growth rates on that?

Eric Martinuzzi - Craig-Hallum

Correct.

Tom Vadnais

All right. Well Sam has beenlooking at these numbers now. Are you ready to respond to that one, Sam?

Sam Paisley

It is flattish, Eric. Yeah, but Iknow, we have an anniversary of the decline in the promotional lead gen and I'mtrying to digest that information as I build my model for 2008.

Tom Vadnais

Yeah that's the wild card; it's the decline in lead genwhich we've talked about quite a bit obviously. And, it calculates your modelfor next year. It's a big variable as when will the lead gen business get backinto the growth mode and so on and that your guess is as good as ours on that.

Eric Martinuzzi -Craig-Hallum

Well, I'm actually not forecasting lot of growth there I amassuming its flat and not a big delta from here.

Tom Vadnais

That’s the same assumption we are making.

Eric Martinuzzi -Craig-Hallum

Okay. Alright. Thanks.

Tom Vadnais

Okay.

Eric Martinuzzi -Craig-Hallum

Sorry one more. The buyback, did you do any buyback sincethe quarter ended?

Tom Vadnais

Since Q3 ended?

Eric Martinuzzi -Craig-Hallum

Yes.

Tom Vadnais

No.

Eric Martinuzzi -Craig-Hallum

Okay thanks.

Operator

Our next question will come from Mark May with Needham &Company.

Mark May - Needham& Company

Thanks. I think most of my questions have been answered. Iwill ask, let's see I will ask two here. In terms of the guidelines that youmay be asked to meet in terms of commercial lead gen. are you already needingwhat you expect to be these new guidelines and if so when did you make thischange over? And the other question is, you talk about the assumption for leadgen to be flat in the fourth quarter, was that business flat in September andOctober? Thanks.

Tom Vadnais

Yes. September and October was pretty much flat and that'swhy we have come with a conclusion we think it stabilized at its current leveland why we are projecting it to be flat for Q4. So I think you got that oneright. Relative to the FTC guidelines, one of the problems here is theguidelines aren’t very clear in this area. So we think and we stated this whenwe made the announcement of the initial FTC letter we got in May. Maybeannouncement that we thought we were in compliance with all of the currentregulations and we still would believe we are.

But we acknowledge that there is a lot of ambiguity andexactly what the guidelines are and the positive outcome for this I think forus and everybody in the industry will be more clarity from the FTC on what ispermissible and what isn't. So, we are looking forward to getting that resolvedand we continue to feel that we are in compliance with the guidelines as weunderstand them today. Did we get both the questions answered?

Eric Martinuzzi -Craig-Hallum

I think so. It was just based on your commentary in yourprepared remarks. It sounded as though, maybe you had gained a little moreclarity, in your conversations with the FTC, but it doesn't sound to be that.

Eric Martinuzzi -Craig-Hallum

The clarity that we have gained is we understand better whatthey are looking at, and we understand the process and, as we have said, wethink that, they will probably want to have some sorts of fine for us, whenthis concludes because they may interpret that we haven't been doing thingsexactly like they would have liked.

So we don't know, if that's going to happen and so what wesaid was we thought if there is a fine, it wouldn't be material to ourfinancial condition. And then the other thing, we said is that we willanticipate and this is based on previous FTC investigations they have done thatwe have heard about. We will anticipate, that there would be some sort of astipulated injection we would agree to, to on a go forward basis and what wewill be agreeing to this, what the new rules of the road are that theyestablished. So that's the only new news really that we have at this point.

Gary Fuges

Thank you. Operator next question please

Operator

We will hear from Chad Bartley with Pacific Crest

Chad Bartley - Pacific Crest

Hi, thanks for taking my question. Sorry if I miss, there isbeen a lot of question on MeziMedia. I think a quarter ago, you guided toroughly $25 million to $30 million in contribution from Mezi for the fivemonths. It seems like that's a little conservative given the $20 millioncontribution in two months in Q3. Have you updated what you think Mezi willcontribute in those five months total or may be can you just make it easy andtell us what do you think we'll see in Q4 thanks.

Tom Vadnais

Okay. Sam, make it easy.

Sam Paisley

So, on our last quarter's call we said that we expected $25million to $30 million from Mezi in the current year. We are now thinkingthat's more or like $45 million to $50 million.

Chad Bartley - Pacific Crest

Okay. Thank you.

Operator

Our next question will come from Sandeep Aggarwal.

Sandeep Aggarwal - Oppenheimer& Co

Sorry for beating the dead horse here, but one question onlead generation. And I want to focus on the non-promotional lead generation.Can you talk about the pricing trends renewal rate for the advertisers andaverage spend per advertiser? How it has trended since you have been involvedin FTC investigation for the promotional-base lead generation?

Sam Paisley

No, I really haven't disclosed those kind of details. Imean, it's obvious from what we've said on the call that there is somespillover effect into lead generation in total. But, we indicated that in theQ&A part here that there was a $9 million quarter-over-quarter sequential declinein the promotional owned and operated sites.

Sandeep Aggarwal - Oppenheimer& Co

Okay. And just one question on the international business:Can you talk about how is your effort to ramp up your international business inEurope and Chinaafter the MeziMedia acquisition going on? And especially, if you can throw anycolor in terms relative strength for any particular segment internationally.Thank you.

Tom Vadnais

Not sure we have growth rates separately…

Sam Paisely

Yes. Sandeep, we will have to get back there in terms ofgrowth rates for international versus US. Those will be in the Q, which we willfile in a short amount of time here. But, I don't have the breakout forinternational versus US. I can tell you that, you may recall when we went forreporting segments those were worldwide product segments. So, we weren'tproviding US versus international color by business segment. So, we will beable to give you overall US versus overall International in a follow-up call.

Tom Vadnais

I think it is fair to say that the growth rates in Europeare higher by a fair amount in Europe than they are in the US. And the only segment that wouldaccepted there would be comparison shopping and in the US market Mezi performance isreally driving that growth.

Sandeep Aggarwal - Oppenheimer& Co

Thank you.

Operator

Our next question will come from Jason Helfstein of CIBCWorld Markets

Mayuresh Masurekar -CIBC World Markets

Hello this is Mayuresh calling in for Jason. You mentioned a42% growth rate in the display business 3Q '07 and I was wondering if you couldbreak it out between traffic growth and monetization.

Sam Paisely

Sorry, Mayuresh.

Tom Vadnais

Could you repeat the question?

Mayuresh Masurekar -CIBC World Markets

Sure. You mentioned that the display business grew a 42% in3Q '07 and we were wondering if you could break it out between traffic growthand monetization.

Sam Paisely

Well, I am not sure what do you mean by monetization price.

Mayuresh Masurekar -CIBC World Markets

Basically pricing.

Sam Paisely

But essentially, I will call it traffic management andutilization as apposed to unit prices.

Tom Vadnais

Volume is up. Impressions are up. If that's what you mean bytraffic?

Mayuresh Masurekar -CIBC World Markets

So, most of it came from essentially higher impressions orwas there also pricing uptick that you saw during the quarter.

Sam Paisely

What we said about our pricing environment is that priceshave generally been slightly increasing. That's being fuelled by acceptance ofnew product ideas and [demand and] premium, not just behavioral targeting andvideo. But most of the growth that we are experiencing is largely a function ofbetter utilization of available inventory and therefore the ability to get evenhigher amounts of inventory from publishers who want to be active in thedisplay business.

Mayuresh Masurekar -CIBC World Markets

Well thanks.

Gary Fuges

Thanks. Operator we have time for two more questions,please.

Operator

Yes. Our next question will come from Robert Coolbrith withThinkEquity Partners.

Robert Coolbrith -ThinkEquity Partners

Good afternoon, everyone, this is Rob on the call for Bill.Just to revisit lead generation for the moment, it sounds like you've changedyour definition slightly of lead gen, and sort of kept a little bit ofconfusion about the proportional contribution. If you had to give a pro formanumber Q1 versus Q3 on apples-to-apples basis, what it would be? And then alsojust quickly on BT, in terms of your efforts there. Are you moving beyondtargeted -- retargeting to selling behavioral segments. And then, finally, ifyou any comments on when you might or might not be doing that exchanges? Thanksa lot.

Sam Paisely

So, in terms of the lead genquestion: I don't want to make too much of the slight re-measurement; withrespect to promotionally owned and operated sites: absolutely no change, nochange whatsoever. With respect for lead generation activities: overall a very,very slight change. So, it shouldn't really change much of thecharacterizations of the total numbers and as someone mentioned earlier on thecall, lead generation in total at $235 million to $240 million for the fullyear is materially in the ball park.

With respect to the otherquestions: in behavioral targeting I'd say the thing that somewhat unique aboutus, is not only can we comprehend simple kind of remarketing to visitors whohave come to particular merchant sites, we have the technology platform that'sable to tailor and customize programs for merchants that want us to addresstheir specific needs as opposed to simply reselling consumer profiles on a canor a standardized basis. I can't remember the last.

Tom Vadnais

The other question was onexchange and what we've said before on exchange, if we are observing theexchange model we haven't seen, it get a lot of traction yet as it does,perhaps we'll be a buyer of inventory on exchange. If we think it's a modelthat really can help us, we can have an exchange up and running based on ourown technology in a short period of time. So, we are observing the exchangemarket but, at this point that's all we have to report on it.

Robert Coolbrith - ThinkEquity Partners

Great, thank you very much.

Tom Vadnais

One last question Gary?

Gary Fuges

I think that was it Tom. Well,I'm sorry, I apologize, no we do have one more.

Operator

Our next question will come from PeterKuechle with Frontier Capital.

Peter Kuechle - Frontier Capital

Hey guys, just a question on theQ4 guidance in the leverage in the business model. The revenue guidance is forup, revenues about 10% sequentially but the EPS guidance is for flat upon theirpenny. Can you just talk about why there wouldn't be more earnings leverage inthe business model in the fourth quarter?

Tom Vadnais

Well, the guidance that we gaveis $0.17 to $0.18.

Peter Kuechle - Frontier Capital

Yeah.

Tom Vadnais

And that's coming off of a $0.17quarter, so we have a little room in there for growth.

Sam Paisley

Well, the other thing you shouldtake into account is that, as you go throughout the year, the effect of stockoption grants and the amortization of related comp expense and the fact that weare now going to have MeziMedia and for full quarter with full amortizationexpense is part of the mechanics of that fourth quarter calculation. It's alsotrue if you were to calculate the amount of fourth quarter on left, there isfar less operating leverage in this fourth quarter because of the modestexpectations for lead generation business in the fourth quarter of this year.

Peter Kuechle - Frontier Capital

Great, that's very helpful.Thanks for taking my question.

Tom Vadnais

Thank you. All right, thatconcludes our call, thank you everybody.

Operator

Thank you for participating intoday's ValueClick's third quarter conference call. A replay of today'sconference will be available beginning at 4:30 p.m. Pacific Time today by dialing 1-888-203-1112 or1-719-457-0820. The access code for the replay is 8245264. The replay will beavailable through 9:59 p.m.Pacific Time on November 8, 2007. Thereafter, a replay can be accessed on ValueClick's websiteat www.valueclick.com. Thank you for your participation and have a great day.

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